Trade Liberalization and China’s Food Economy in the 21st Century: Implications to China’s National Food Security

Jikun Huang, Cunlai Chen

Center for Chinese Agricultural PolicyChinese Academy of Agricultural Sciences

and

Scott Rozelle

University of California, Davis

A Paper Presented in "China's Agricultural Trade and Policy: Issues, Analysis, and Global Consequences," San Francisco, California, June 25-26, 1999; A Mansholt Seminar on September 15, 1999, Wageningen University; A Conference on "The Effects of Trade Liberalization on Agriculture," CGPRT/ESCAP, United Nations, Bogor, October 5-8, 1999; the Kobe International Symposium on Food Security Issues in Northeast Asian countries in the 21st Century, November 13-14, Kobe University, and A Policy Seminar, International Food Policy Research Institute, Washington DC., November 16, 1999.

Trade Liberalization and China’s Food Economy in the 21st Century: Implications to China’s National Food Security

I. Introduction

Since the economic reform initiated in the late 1978, China’s economy has been growing substantially. The annual growth rate of China’s GDP was 8.5% in 1979-84, 9.7% in 1985-95 and 9.2% in 1996-97 (Table 1). Despite the Asian financial crisis since 1997, China's economy continued to grow though at a slower rate than the previous years. The GDP grew at 7.8% in 1998 and nearly 8% in the first half year of 1999 (compared to first six months of 1998), the growth rates were still among the highest in the world (SSB, 1999).

China’s foreign trade has been expanding even more rapidly than its overall economic growth (Table 1). With the rapid growth of the external sector, foreign trade has been playing increasing role in the national economy since reform started in the later 1970s. China’s trade to GDP ratio increased from 13% in 1980 to 36% in 1997 (Table 2).

During the same period, the total value of China’s agricultural trade increased from US$9.29 billion to US$25.15 billion, with an annual growth rate of 6.0% (Huang and Chen, 1999b). China applied to join GATT and then the World Trade Organization (WTO) in 1986, although China has not been accepted as a member of the WTO, China has committed to comprehensively implement the Uruguay Round agreements upon its accession into the WTO.

With 13 years negotiation on China’s WTO accession, particular the recent progress made during Premier Zhu Rongji’s visit to the United States in April of 1999, it is likely that China will join the WTO before the end of 1999. The sheer size of China’s economy and its rapid growth will make China a crucial player in the future development of world markets for inputs and outputs of food and agricultural products, agribusiness, and industry. While the negotiation is still undergoing, there has been also growing concern on the impacts on China’s accession to WTO on China’s domestic agricultural production, price and market, employment and the farmer’s income, particularly in the short term. How to sustain agricultural growth, achieve food security, and increase farmers’ income with the process of agricultural trade liberalization has been the priority concern of not only the policy makers but also the farmers. What are the impacts of trade liberalization on China’s agricultural production? What are the implications of the trade liberalization to China’s food security and world trade? What are the policy implications of the changes in the

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economy resulted from the trade liberalization in the future?

The answers to these questions are by no means clear. While all studies show that both China’s economy as a whole and the rest of the world will benefit from the China’s WTO accession, their impacts on China’s agriculture are highly debated. Some researchers claim that the impacts of China’s accession to the WTO on China’s agricultural production and world trade are marginal (Anderson, 1997). Others believe that the impacts of trade liberalization on China’s agricultural sector should not be understated (Wang, 1997; the State Council, 1998; Huang, 1998; Huang and Chen, 1999a, 1999b).

To have a better understanding of the questions raised above, the overall goals of this study are to examine the reform process of China’s foreign trade sector and its impact on China’s agriculture trade patterns in the past 2 decades, to explore the possible effects of trade liberalization on China’s food balance and its implication to agricultural trade, and to provide some policy recommendations for the smooth implementation of agricultural trade liberalization in China.

The paper is structured as follows. The next two sections present an overview of the reform in China’s external sector and its impacts on agricultural trade in the past 2 decades. In the fourth section, the effects of the trade liberalization on China’s agriculture are projected using a agricultural sector wise general equilibrium model. Finally, conclusions and policy implications from the study are summarized in the last section.

II. Reform in China’s External Sector and Agricultural Trade Pattern

Foreign Trade Regime in the Pre-Reform Period (Before 1979)

After the founding of the People’s Republic of China in 1949, China soon established the socialist planning economy. Under the desire of accelerating the national economic growth and industrialization, like many other developing countries, China adopted the “import substitution” industrialization strategy, and established a highly centralized and planned foreign trade regime. Under this foreign trade regime, export was aimed to serve import and foreign trade was aimed to serve national industrialization (Lardy, 1992 and 1995). This planned foreign trade regime was implemented strictly under the rules and regulations on trade organization and operation, trade management and control, trade planning, and trade financing. The foreign trade rights were granted by the Ministry of Foreign Trade to only a few state owned enterprises (SOE) or corporations. For a national as a whole, only 12 national specialized general foreign trade corporations and their port sub-corporations had the trading rights. These 12 national specialized general foreign trade corporations and their port sub-corporations monopolized all foreign trade business in

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China before 1978. For example, foreign trade of agricultural products was monopolized by COFCO, China National Native and Animal Products Import and Export Corporation, and China National Textiles Import and Export Corporation.

Foreign trade management and control were mainly based on government administrative means (Huang and Chen, 1999a). The state foreign trade plan was mandatory and covered all aspects of foreign trade, including foreign trade procurement, transfer and allocation, export, import, foreign exchange earnings and payments and so on. Foreign trade corporations were not responsible for making profits and losses from trade. The Ministry of Finance was responsible for all profits and losses and also provided all working capital to foreign trade corporations.

The Early Reform Period (1979-1987)

China implemented a series of important policy and measures in the early period of foreign trade reform. The highly centralized and monopolized foreign trade operation system was gradually reformed and partially decentralized by establishing more new trade-ports and granting more corporations and production firms the direct foreign trading rights. From 1979 to 1987, more than 2,200 foreign trade corporations were established, increasing 11 times than the number of foreign trade corporations in 1979. The single mandatory planning foreign trade system was also replaced by a new system that introduced the guidance plan and market adjustments to the old mandatory plan in order to improve the trade response to the domestic and international market changes in 1985. This new foreign trade system covers most majority products except a few bulk products which are important to the national economy and people’s livelihood, including most agricultural products (mainly grains), and the imports of whole set of equipment and technology.

The reform of foreign trade management system was gradually performed by reducing government direct administrative intervention and by introducing trade instruments to manage foreign trade. In 1980 China established the quota system and restored the licensing system to manage import and export of commodities including agricultural products. Meantime, the experiments on linking foreign trade corporations with production firms were carried out in order to improve the quality of export products and increase competitiveness in the international market in 1982. To promote export, China introduced export tax rebate in the early 1080s, and experienced a trade contract responsibility system in 1987 (see the next sub-section for details of the contract system).

Toward A More Market-Oriented Trade Reform Period after 1987

Despite the progress made in reforming China’s foreign trade sector in the early stage of reform, the fundamental problems in the foreign trade sector remained, namely the efficiency of the trade and the budget financing system. The foreign trade

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reform since the late 1980s has been trying to fully implement the trade contract responsibility system and to introduce a more market-oriented trade regime in the economy. Other major trade policies include regional open door policies, foreign direct investment policies, fiscal policies, monetary policies, foreign exchange policies, and foreign trade control (tariff and non-tariff measures) policies.

Foreign Trade Contract Responsibility System

Drawing on the experiences of the foreign trade contract responsibility system experimented on the national specialized general foreign trade corporations in 1987, the foreign trade contract responsibility system has been implemented national wise since 1988-90. The contract system consisted of three major components: foreign exchange earnings of exports, the shares of foreign exchange earned between the central government and trade agencies, and overall economic efficiency.

To facilitate the implementation of foreign trade contract responsibility system, the Chinese government introduced a number of complementary measures. The foreign exchange control (use right) was relaxing. Although China introduced foreign exchange retention system that allowed the enterprises and local governments to retain certain proportion of foreign exchange earned through their expanded exports as the early as 1979, the use of the retained foreign exchange had been strictly controlled by the central government before 1987. The 1988 policy allowed local governments and enterprises to have their own rights in disposal or use of the retained foreign exchange through the foreign exchange swap centers that was established in the same year in the key cities of each provinces and Special Economic Zones (SEZs). Enterprises, including foreign funded enterprises, could purchase and sell foreign exchange at the foreign exchange swap center at the managed floating exchange rate. This policy had been in effective until the unification of the official and swap foreign exchange market in 1994. In December 1996 RMB became convertible on the current account. Other polices related to the responsibility system include providing more decision-making powers to local governments and enterprises in granting foreign trading rights to foreign trade enterprises, in FDI for the coastal economic areas in approving foreign direct investment, in controlling quotas and licenses, and in importing materials for processing.

Export Subsidies

Under the planned foreign trade regime, foreign trade corporations were not responsible for their profits and losses incurred from foreign trade business. The Ministry of Finance was not only took all profits and covered all losses but also provided all working capital for foreign trade corporations. Because of the distorted domestic pricing system, the export subsidies were a common phenomenon under the planned foreign trade regime. China fixed its export subsidy for 1988-90 to a level equal to about 4% of the total export value in the 1987 in order to curb the rising trend

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of the subsidy that caused not only the financial difficulty, but also inefficiency of the trade sector. Finally, the government decided to phase out export subsidies to all foreign trade corporations in 1991.

Export Tax Rebate

To promote export and to increase the competitiveness of China’s export commodities in the international market, China started to use export tax rebate in 1983 for only 17 export commodities on an experimental base. This policy then had been extended to cover more export commodities since the mid-1980s and apply to almost all export commodities after 1988. The type of export tax rebate has included the product tax, value-added tax, business tax and special consumption tax since 1988.

The principle for the rate of export tax rebate is that exports should be zero-rated and eligible for a full rebate on the value-added tax (13% for some selected commodities mentioned above and 17% for all other commodities) and consumption tax paid. This export tax rebate policy applies to all export commodities except crude oil, refined oil, export commodities for foreign assistance, commodities prohibited for export by state, and sugar. However, in the actual implementation of the new export tax rebate, the claims for rebates on value-added tax paid on inputs imported for export production substantially exceeded expectations, thus in 1995 the rebate on inputs purchased for export production was reduced to 14% and latter to 9%. The value-added tax on inputs purchased for export production imposes an effective net tax on exports. Improvement in the administration of the law that would raise the collection rate and allow a return to zero rating for exports would substantially improve trade performance (World Bank, 1997).

Trade Related Monetary Policies

China’s monetary policy refers to the measures which the People’s Bank of China, the central bank, takes in controlling the money and credit supply to bring about the desired changes in the economy. Since economic reform China has been gradually moving away from a planned economy towards a market economy. As a result, China has been increasingly using the monetary policy as one of the main means in its macro-economic adjustment and control. To help and promote foreign trade after phasing out export subsidies, China established the Import and Export Bank to provide the trade cooperatives with import and export credits in 1994

Foreign Exchange Policies

With the unification of the two-tier foreign exchange rate systems, the foreign exchange retention system has been finally abolished since 1994, and the RMB has become convertible on the current account since 1996. Historically, the overvaluation

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of domestic currency for trade protection purposes has reduced exportable incentives. Real exchange rates remained constant and even appreciated during the 30 years prior to reforms, but depreciated rapidly after reforms, with the exception of several years following the high domestic price inflation of 1985. From 1978 to 1992, the real exchange rate depreciated more than 400 percent. Economic productivity growth and technological innovation in agriculture, foreign trade, and industry contributed to low inflation and the success of exchange rate adjustments. Within Asia, China is second only to Indonesia in aggressively adjusting exchange rates over the last two decades except for recent 5 years (real exchange rate has been appreciated by about 30 percent from 1992 to 1997). Falling exchange rates increased export competitiveness and so have contributed to China’s phenomenal export growth record (i.e. non-grain food products) and the spectacular national economic performance of the 1980s.

Tariffs and Non-Tariff Measures

China’s average tariff was 47.2% in 1991, one of the highest countries in the world (World Bank, 1997). Since then, China has gradually reduced its import tariff rates. In April 1996 China reduced its import tariff rates for more than 4,900 items, lowering the simple average tariff rate from 35.9% to 23%. In October 1997 China further reduced the import tariff rates for more than 4,800 items and brought down its simple average tariff rate from 23% to 17% (23.6% for agriculture). Currently, relevant departments are studying specific products and implementation steps for tariff reduction. Apart from that, China has actively participated in the consultations on the tariff-related actions for early voluntary sectoral liberalization.

According to China’s 1997 Individual Action Plan submitted to APEC, in the short term China committed to reduce its average tariff rate to 15% by 2000 (Table 3). In the medium and long term from 2001 to 2020, China will reduce its average tariff rate for industrial products to 10% by 2005. China will eliminate tariffs of 185 information technology products by 2005 except a few of them by 2007. China will take actions actively and steadily toward tariff reduction in sectors identified for early voluntary sectoral liberalization in accordance with relevant agreement or arrangement concluded by APEC members. And China will further lower the overall tariff level.

During the 1980s China extensively used quotas and licensing to control its

foreign trade. However, since the early 1990s China has progressively and drastically reduced the number of items subject to export and import quotas and licensing administration. The products subject to quota, licensing and other import control measures accounted for only 5% of the total import tariff lines in 1998.

In sum, through nearly 20 years reform, China’s foreign trade regime has gradually changed from a highly centralized, planned and import substitution regime to a more decentralized, market-oriented and export promotion regime. While

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significant progress has been made since the economic reform in liberalizing the trade regime, China’s foreign trade regime still has major inefficiencies. China still largely monopolizes international trade in agricultural products.

Domestic Support of Agriculture

Fiscal and financial policies

Government fiscal expenditure on agriculture has been consistent higher than fiscal revenue from agricultural tax and other fees collected from agriculture (Huang, 1999). However, this fiscal revenue from agriculture based on explicit tax and fees is only small portion of the total agricultural capital contribution to the industry and to the urban sector. A significant capital outflow from agriculture to industry occurred in the last 2 decades through financial system, particularly through Rural Credit Cooperatives (Huang and Ma, 1998). After accounted for agricultural explicit tax through government procurement system, they show that China accumulated a total amount of about 313 billion yuan (at 1985 price) from agricultural sector for the national industrialization in 1978-96, and about 563 billion yuan from the rural sector for the urban economy in the same period. Moreover, the shifting capitals from the agriculture to the industry, and from the rural sector to the urban have shown an increasing trend since the reform initiated in the late 1970s.

Agricultural Protection

Price and market reforms are key components of China’s development policy shift from a socialist to a market-oriented economy. The price and market reforms initiated in the late 1970's were aimed at raising farm level prices and gradually liberalizing the market. These reforms included increases in quota and above quota prices, reduction in quota levels, introduction of above quota bonuses for cotton, tobacco, and other cash crops, negotiated procurement of surplus production of grains, oils, and most other commodities, and flexibility in marketing of surplus production of all categories of agricultural products privately.

Table 4 shows the estimates of nominal and real protection rates based on various producers' prices from 1978 to 1998 for selected agricultural commodities. Several observations may be made from Table 4. The quota prices consistently represented a disprotection to farmers. The introduction of negotiated procurement significantly reduced the disprotection from government procurement operations. Not surprisingly, the most heavily taxed commodities are the exportable – rice. Wheat, importable commodity, is more favored. Aside from the lower quota price NPR for rice, the proportion of grain procurement at the higher negotiated price is typically higher for corn and soybeans. It is also worth to note that the NPRs for wheat and maize at free market prices have been about 20-25 percent since the mid-1990s.

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In sum, despite substantial efforts to liberalize the price and market structure of the agricultural sector, most major agricultural commodities continue to be heavily penalized by commodity specific policies. When the impact of the overvaluation of the domestic currency due to the trade protection system is considered, the agricultural incentives would even be more undervalued. These distortions in price incentives depress agricultural production and redistributes income from farmers to urban consumers and the agro-processing sector.

III. Patterns of Agricultural Trade

Trends of Total and Agricultural Trade

One of the most significant features of China’s open door policy and the shifting trade regimes is the remarkable expansion of China’s international trade. The average annual export rose from US$ 22.16 billion in 1980-84 to US$160.84 billion in 1995-97, increased more than 7 times or with an annual growth rate of 14.6% (Huang an Chen, 1999b). Although the import also increased significantly, increased more than 6 times during the same period, the annual growth rate of the import (12.2%) was lower than the export growth. This led China moving from a trade deficit in 1980s to a significant trade surplus in 1990s. China has enjoyed annual trade surplus of about US$ 23 billion since the mid-1990s. Currently, China has about US$ 140 billion foreign exchange reserve (SSB, 1999).

Because of the fast growth of international trade, China has greatly improved its position and increased its share in the world trade. China’s exports ranked only the 26th place in 1980 , however, it ranked the 11th in 1996 among the world trading nations, and in 1997 China was the 10th largest trading nation in the world. In the same time, China’s share in the world total trade also increased, for example, its export share increased from 0.9% in 1980 to 2.9% in 1996.

Agricultural trade had been an important contributor to China’s foreign trade. However, because of the declining trend of agriculture in China’s economy, the importance of agricultural trade in China’s total trade has been declining since 1980 and particularly since the early 1990s. The share of agricultural trade in China’s total trade was 21% in 1980-84 and declined to 8.7% only in 1995-97 (Table 5). The shares of agricultural export and import in China’s total export and import presented the same declining trend.

Despite the share of agricultural trade in China’s total trade has declined, however, China’s agricultural trade has also increased during the past two decades but with a slower growth rate as compared to the much faster growth rate of China’s overall foreign trade. As shown in Table 11, the annual China’s agricultural trade value increased from US$9,112.8 million in 1980-84 to US$25,772 billion in 1995-97, with an annual growth rate of 6.0%. During the same period, the annual growth

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rate of agricultural export was 8.0%. China’s agricultural trade balance has been in a surplus position since 1983. Annual agriculture trade surplus reached about US$ 4-6 billion in 1990s.

In terms of the degree of “openness” of China’s agricultural sector, as shown in Table 2, China’s agricultural sector has been relatively less open to the world economy than the rest of China’s economy. However, the ratio of agricultural trade to agricultural GDP has increased from 10.3% in 1980 to 14.9% in 1997, indicating that while the sector’s participating rate in the world market is relative low, China’s agricultural sector has been increasing its participation in the world agricultural market since 1980s. Comparing agricultural export and import, from 1980 to 1997 the ratio of agricultural export to agricultural GDP increased from 4.6% to 9.1%, while the ratio of agricultural import to agricultural GDP has barely changed. This may suggest that China’s increasing participation in the world agricultural market is mainly in its agricultural export sector, a reflection of moving from import-substitution strategy to a more export promoting regime.

The Changing Structure of China’s Agricultural Trade

For the purpose of analysis, we grouped the agricultural trade data in two ways. First, in the analysis of the composition of China’s agricultural trade, we divide the agricultural trade data into four categories based on the nature of commodities, namely grains and edible vegetable oils, horticultural products, animal products and other agricultural products. Second, in the analysis of the patterns of China’s agricultural trade, we grouped the agricultural trade data into three categories based on the factor intensity of production, namely land intensive agricultural products,1

labor intensive agricultural products,2 and labor/capital intensive agricultural products.3

China has been exporting mainly horticultural and animal products, while importing grains and edible vegetable oils. These patterns of agricultural trade are consistent with China’s resource endowments.

1 Land intensive agricultural products include: cereals; vegetable oil seeds and oleaginous fruits; edible vegetable oils; raw cotton; and other vegetable textile fibres.2 Labor intensive agricultural products include: live animals; fish and crustaceans, and other aquatic invertebrates; dairy produce, bird's eggs, natural honey, edible products of animal origin; live trees and other plants; bulbs, roots and the like; cut flowers and ornamental foliage; edible vegetables and certain roots and tubers; edible fruits and nuts, peel of citrus fruits or melons; coffee, tea, mate and spices; products of the milling industry, malt, starches and wheat gluten; plants for industrial and medicinal use; rice straw and forage; lac, gums, resins and other vegetable saps and extracts; vegetable plaiting materials; vegetable products not elsewhere specifies or included; animal fats and waxes; raw silk; and raw wool.3 Labor/Capital intensive agricultural products include: meat and edible meat offal; preparations of meat, fish and crustaceans, and other aquatic invertebrates; sugars and sugar confectionery; cocoa and cocoa preparations; preparations of cereals, flour, starch or milk, and pastry products; preparations of vegetables, fruits, nuts or other parts of plants; miscellaneous edible preparations; beverages, spirits and vinegar; residues and waste from the food industries; prepared animal feeds; tobacco and manufactured tobacco substitutes; raw hides and raw furs.

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Tables 6 and 7 present the annual shares of exports and imports of the four commodity groups in China’s agricultural trade from 1980 to 1997. As the tables show, in terms of exports, the changing trend in the patterns of agricultural exports has occurred since 1985. The shares of horticultural products and particularly the animal products increased steadily and their combined share increased from 57% in 1985 to 75% in 1997. In contrast, the share of grains and edible vegetable oils has declined continuously from 33% in 1985 to 21% in 1997. For import commodities, the changing trend is not as clear as that for exports.

The patterns of China’s agricultural trade for the commodity groups based the

factor intensity are presented in Tables 8 and 9. The results show that China’s agricultural exports were overwhelmingly dominated by the exports of labor intensive agricultural products and labor/capital intensive agricultural products. Their shares accounted for 47% and 35% of China’s total agricultural exports, respectively in the period of 1980-97, and have presented an increasing trend since the mid-1980s. While the exports of land intensive agricultural products accounted for only 19% and the share of their export declined in the same period.

In terms of imports, China’s agricultural imports were dominated by the imports of land intensive agricultural products, accounting for 59% of China’s total agricultural imports. While the imports of labor intensive agricultural products and labor/capital intensive agricultural products accounted for only 20% and 21% of China’s total agricultural imports, respectively. Similar to the results presented in Table 7, no clear trend was found in the imported commodities.

In sum, the above discussion of the patterns of China’s agricultural trade has revealed two main points. First, in terms of the aggregate level, the pattern of China’s agricultural trade is consistent with China’s domestic resource endowments. China was a net exporter of labor intensive and labor/capital intensive agricultural products, like horticultural products, animal products and processed agricultural products, and a net importer of land intensive agricultural products, like grains, cotton, and edible vegetable oils. Second, in terms of the changing trend, there are evidence and reasons to argue that over the past two decades the patterns of China’s agricultural trade have been moving more closely towards playing its comparative advantage especially in exporting more labor intensive and labor/capital intensive agricultural products.

IV. Impacts of Trade Liberalization on China’s Agriculture

A Brief Discussion of the Model

In order to evaluate the impacts of trade liberalization on China’s agriculture in the future, we apply an existing CCAP's Agricultural Policy Simulation and Projection Model (CAPSiM). CAPSiM was developed out of need to have a

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framework for analyzing policies affecting agriculture in general, polices related to the macro-economy, trade, and policies directed to agricultural commodities in particular. CAPSiM is a partial equilibrium model, or sector-wise general equilibrium model (considering all cross price impacts for both demand and supply equations). It is the first most comprehensive model for China’s food demand, supply and trade analysis. Most of the elasticities and parameters used in the CAPSiM are estimated econometrically with imposition of theoretically constraints. In the projection or policy simulation, prices can be determined endogenously or exogenously. CAPSiM explicitly accounts for urbanization and market development (demand side), technology, agricultural investment, environmental trends and competition for labor and land use (supply side), as well as the price responses of both demand and supply.

The main purpose of the CAPSiM is to project key agricultural variables in the short-term as well as in the long run in response to the changes of the exogenous shocks to the economy. It is also designed for analyzing the likely impacts of specific policies on key variables such as crop sown area, yield, production, prices, consumption, commodity demand and its components (food, feed and other use), stock, and export and import for each agricultural commodity. Details of the model description could be found in Huang and Rozelle (1998), and Huang and Chen (1999b).

Defining Projection Scenarios

All simulations begin with the year of 1994-1996, the base period. Base period data on production and utilization are three-year averages centered on 1995.

Baseline Scenario

Income growth and population growth will remain an important determinant of food balance in the future. Population growth peaked in China in the late 1960s and early 1970s. Since then, fertility rates and the natural rate of population growth have begun to fall. Relying on the United Nation's demographic predictions, the growth rate during 1996-2000, is assumed to be 1.11 percent per annum. This annual rate falls during the next 5 years to 0.88 percent, a level that is considerably under the world's projected growth rate (1.70-1.80 percent), but above recent projections by China’s demographers. The shares of urban population will rise from 28 percent in the base year to 31 percent by 2000 and to 35 percent in 2005, and 46% in 2020.

Baseline per capita income growth rate is forecast to average about 4 percent in the rural sector and 4.5 percent in the urban sector. The growth rates in the late 1980s and early 1990s were substantially above this level in the urban economy (around 6-7 percent), and significantly below this in rural areas (less than 1 percent per year between 1985 and 1992). But in recent years the overheated urban growth has slowed, and since 1991, the rural economy has begun to pull out of its recession,

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growing at 4 percent per year.

The agricultural commodity prices under baseline are endogenously determined and are generated from the simulations using CAPSiM model, assuming the current trade policy (tariff levels and non-tariff restrictions) remained.

Supply will respond most to prices, new technology and irrigation investment. The fertilizer price is assumed to be constant in the projection period. But the opportunity costs of land for crop production and labor for the whole agricultural sector are assumed to grow 1 percent and 2 percent, respectively, in 1996-2005.

Technological change has significantly contributed to China's agricultural growth in the past (Huang and Rozelle, 1996; Fan and Pardey, 1997). However, annual expenditures on research declined from 1985 to 1990, and irrigation expenditures dropped from 1975 to 1985. Because of lags, these early investment dips will keep baseline projections of investment growth below historic rates in the early projection period. The recent recovery in research and irrigation investments, together with the experience of other Asian countries and China's commitment to a strong domestic grain economy, leads to the expectation that China will sustain its recent upturn in investment funding over the long run. The annual growth rates of research and irrigation expenditure are assumed to be 4.0 percent and 3.5 percent respectively in the future. Erosion and salinization are expected to continue to increase at a steady but slow pace.

Alternative Scenarios: Free Trade and Productivity Enhancement Growth Scenarios

While China is not a WTO member, it is likely that China will join WTO soon given the progress that has made in recent various WTO’s negotiations. On the other hand, a preside formulation for a scenario that China will fit in after its join WHO is difficult as the final agreement has not been reached despite after 13 years negotiations. In order to have a better understanding of the impacts of China’s accession to the WTO on China’s domestic agricultural market and trade, we assume that China will continue liberalizing its agricultural sector and reach a free trade environment for the most agricultural commodities by the year of 2005. Specifically, the free trade scenario in this study assumes 14 major agricultural products (7 grain products including rice, wheat, maize, soybean, sweet potato, potato and other grains, and 7 animal products including pork, beef, mutton, poultry, egg, milk and fish) will gradually reduce its tariff level, export subsidies, and trade barriers after 2000, and will reach a zero tariff, completely phase out non-tariff trade barriers by the year 2005. This represents a maximum impact of trade liberalization on China’s agriculture. The actual impact of trade liberalization and China’s joining WTO will lay between the simulation results of the baseline scenario and the free trade scenario.

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Under the free trade scenario, both import tariff and trade barriers for agricultural inputs such as fertilizer and pesticide will also be reduced and eventually be phased out in 2005, therefore the fertilizer and pesticide prices are assumed to decline by 20 percent from 2000 to 2005. All other assumptions are the same as those defined in the baseline scenario.

It is worth to note that the CAPSiM model is a country model. The impacts of China’s trade liberalization on the world market prices are not examined given the nature of the model. It is expected that the increase in the import of feed grain under the free trade scenario will raise the international market prices of feed, particular maize price. Similarly, as we will see from the simulation results presented in the next section, trade liberalization will increase China’s pork and poultry export. Therefore, we are expecting the world pork and poultry prices will decline with the extent of China’s trade liberalization.

In order to estimate the impacts of the world agricultural price changes (due to China’s trade liberalization) on China’s agricultural trade, we simulate the free trade scenario in 2 stages. In the first stage, the world prices of all agricultural products are assumed to be constant in the real term in 2000-2005. The results from the first stage on China’s imports and exports of various agricultural commodities then are used as the information to adjust the possible changes in the world market. In the second stage, the model will simulate with the changes in the world prices. This procedure could be repeated until the marginal changes from additional round of simulation in the imports or exports of agricultural commodities are minimal.

In order to provide a long term prospects on China’s food security under a free trade regime, we project China’s food supply, demand and trade toward 2020 under a free trade scenario without and with the progressive improvement in agricultural productivity enhancement investment. The later assumes that the annual growth rate of agricultural research expenditure will rise from 4 percent (baseline assumption) to 6 percent.

Impacts of Trade Liberalization on China’s Agricultural Prices

Table 11 presents the price differences of the selected agricultural products in China’s domestic markets under the baseline scenario and the free trade scenario from 2000 to 2005 projected by the CAPSiM.

Under the baseline scenario, the increases in the domestic production of rice, wheat, other grains, and the most of animal products will nearly meet the increase in the domestic demand for these commodities, the changes in their trades over the period of 2000-2005 will be marginal (see next sub-section). Therefore the changes in the domestic prices (real term in 1995 price) of most these commodities will range only from –1 percent to 2 percent in 2000-2005 (Table 11). This implies that China’s

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domestic grain prices, except the price of rice, will continue to be higher than the grain prices in the world market from 2000 to 2005. On the other hand, the animal products, mainly livestock sector will continue to be heavily taxed. Furthermore, the differences between grain prices in China’s domestic and the world markets will increase from 2000 to 2005. In particular, the price of maize, wheat and soybean in China’s domestic market will far exceed the prices in the world market.

In contrast, under the free trade scenario, China’s domestic grain market prices (except for rice) will decline gradually from 2000 to 2005. The prices of wheat, maize and soybean in China’s domestic market will decline significantly, ranging from –10 percent to –20 percent, in 2000-2005.

Table 20 also shows the price differences between the baseline and the free trade scenarios. The results indicate that the producers of crops (except for rice) will loss their income from the farming activities under the free trade scenario (compared to the baseline scenario) as the most crop product prices decline with the trade liberalization. While the most of animal product (except for beef, mutton, and milk) producers, particularly the farmers in raising hog and poultry, will benefit from the trade liberalization. The prices of the pork, poultry, egg, and fish will be about 5 percent to 15 percent higher than those under the baseline scenario in 2005.

Among various grains, rice is the only commodity, its price rise with the trade liberalization. The increase price of rice is the results of increase in the rice export and the reduction of rice demand due to the cross-price substitution of other food grains (mainly wheat). Under the free trade scenario, the percentage changes of wheat, maize and soybean prices related to the baseline will be as high as 19.9%, 26.0% and 20.4%, respectively, in 2005 (Table 11).

The impacts of trade liberalization on the prices of sweet potato, potato and other grains in China’s domestic market are similar. Under the free trade scenario, the prices of these coarse grains will be about 10 percent lower than the prices under baseline scenario in 2005 (Table 11).

Trade liberalization will tend to increase the prices of animal products in China’s domestic market. Our projection shows that the domestic pork price in the free trade scenario will be about 14% higher than that in the baseline scenario in 2005. Similar positive effects of trade liberalization the domestic prices are found for poultry (10%), egg (4%) and aquatic products (6%). On the other hand, the trade liberalization will significantly decrease the domestic price of milk. The milk price under the free trade regime will decline by more than 20% over the period of 2000-2005.

The decline in the prices of grain with trade liberalization, particularly maize, wheat and soybean will dampen the profitability of grain production, reduce the earnings of the farmers whose incomes are mainly from grain production. While

14

demands for maize, wheat and soybean are expected to rise with the decline in their prices. Grain production growth is expected to be slow down with the increasing liberalization of agricultural trade. In contrast, the increase in the prices of pork and poultry will directly increase the returns of these animal products and, therefore, increase the income of pork and poultry producers. Such a “windfall” income increase to these animal product producers will stimulate their incentives in the production of pork and poultry. Consequently, there will be an expansion in the production of animal products particularly the production of pork and poultry in China after trade liberalization.

The interesting point is that the feed grain consumers are the animal product producers. On the one hand, animal product producers will gain from the increase of animal product prices. On the other hand, animal product producers who are also the feed grain consumers will gain from the decline in the feed grain prices, which will reduce the production costs of their animal products. Consequently, we will expect that there will be not only a large increase in feed grain demand, but also a large expansion in animal product production after trade liberalization.

Impacts of Trade Liberalization on Agricultural Production, Demand and Trade

Tables 21 and 22 present the impacts of the trade liberalization (the difference or percentage difference relative to the baseline) on production, consumption and trade of grains and animal products under the baseline scenario in 2000-2005.

Baseline Scenario

According to the analysis, per capita food grain consumption in China hit its zenith in the late 1990s and falls over the remaining forecast period. The average rural resident will increase slightly food grain consumption through 2005, and urban resident food grain consumption will level off in the projection period. The ebb of per capita food grain demand at the national level occurs at a time when both rural and urban food grain demands do not decline because of the impact of urbanization.

Because of the higher quality of fine grains, total rice and wheat consumption per capita will rise slightly through the year 2000, reflecting their still positive, albeit small, income elasticities, both rural and urban consumers demand higher quantities of rice and wheat. Per capita demand for other food grains, however, falls monotonically over the projection period.

In contrast, per capita demand for red meat is forecast to rise sharply throughout the projection period. Rural demand will grow more slowly than overall demand, but urbanization trends will shift more people into the higher-consuming urban areas (in middle 1990s an urban resident consumed about 60 percent more red meat than his/her rural counterpart). While starting from a lower level, per capita demand for

15

poultry rise proportionally more. The projected rise in meat and poultry product demand will stimulate aggregate feed grain demand.

Baseline projections of the supply of grain show that although China’s domestic total grain production will increase from 431.68 mmt in 2000 to 463.78 mmt in 2005 with an annual growth rate of 1.44%. The production growth rate fells bellow domestic grain consumption growth rate (1.60%), indicating a widening gap between domestic supply of and demand for grains. The growth rate of grain production in 2000-2005 will be much lower than the growth rates obtained in 1980s and 1990s, an evidence of the impacts of declining the public investment intensity in agricultural R&D since the mid-1980s (Huang et. al., 1998). The grain net imports will rise to nearly 20 mmt in 2005 (Table 12). Despite the increase in the grain import in the period of 2000-2005, grain self-sufficient level will remain as high as 95-96% in the early 21st century.

In the livestock and aquatic sector, the increases in the domestic production nearly match the increases in demand. The annual production growth rates of various animal products will range from 3% to 7% in the period of 2000-2005, the growth rates are equivalent to the growth rates of the demands for these products in the same period (Table 13). The sector will continue to be an exportable one, but the amount of exported livestock products and fish are very small compared to the size of the total domestic production or consumption.

Pork, which accounted for about 70% of meat or nearly 90% of red meat consumption, its demand will rise from 23.20 mmt in 2000 to 27.46 mmt in 2005 with an annual growth rate of 3.43% in 2000-2005 (Table 13). Under the baseline scenario, pork production is also projected to growth at 3.39% annual, a growth rate level close to the demand growth (note: the livestock data used in this paper are significantly different from the data published by the State Statistical Bureau. CAPSiM model uses a complete new set data that correct for over-report of livestock production and under-report of its consumption). The trends of production, consumption and trade of beef and mutton are roughly the same as those for pork.

The poultry and milk are the only two animal products that require import (4-5% of domestic consumption) to meet the increasing demand. Poultry consumption will rise from 6.29 mmt in 2000 to 7.89 mmt in 2005 with an annual growth rate of 4.61%. Because domestic poultry consumption is higher than domestic poultry production in the base year, although the growth rate of poultry production is slightly higher than that of poultry consumption, China still will be a net poultry importer in 2000-2005. The annual import of poultry will be around 0.25 – 0.29 mmt in 2000-2005. Milk import will present a slightly increasing tread, rising from 0.30 mmt in 2000 to 0.33 mmt tons in 2005, account for 3.4% of the total consumption (Table 13).

16

Free Trade Scenario

Under free trade scenario, domestic grain price (except for rice) will fall. The fall in the domestic price of grain raises the grain consumption and slowdown the production. Our projection shows that China’s domestic grain production will fall far behind domestic grain consumption under the free trade scenario. Compared to the baseline scenario, grain deficit between domestic supply and demand will be further enlarged. China’s net grain imports will increase to 59.61 mmt in 2005 (Table 12, a level representing about 12% of the total grain consumption in China. Comparing with the baseline scenario, China’s domestic grain production will decline by 10.63 mmt (or 2.3%), while China’s domestic grain consumption will increase by 29.28 mmt (or 6.0%) in 2005.

The most serious impacts of trade liberalization on grains are maize, and then followed by wheat and soybean. Under the free trade scenario, China’s domestic maize production will fall far behind maize consumption. The production will grow annually by 0.69% only, while the consumption will grow by 5.91% as a results of the decline in maize price and surging feed demand for livestock production expansion after trade liberalization. Consequently, the imports of maize will increase dramatically from less than 2 mmt in 2000 to 39.31 mmt (nearly one quarter of maize consumption in China) in 2005. China would likely be the world largest importer of maize in the coming years if the sector would be completely liberalized. Comparing with the baseline projections, as shown in Table 21, the net impacts of trade liberalization on the annual maize production, consumption, and trade will be –5.38 mmt, 11.39 mmt, and 16.76 mmt, respectively, for the average of 2000-2005. In the year of 2005 when the completed trade liberalization reached, the net impacts of trade liberalization (relative to baseline) on the maize production, consumption, and trade will reach the highest levels as –10.42 mmt (or a reduction of 7.8%), 20.21 mmt (or an increase of 14.2%), and 30.62 mmt (or an increase of 3.52 times), respectively.

Although wheat is food grain and the food grain consumption response to the price change is weaker than that of feed grains, the impact of trade liberalization on wheat is also substantial. From 2000 to 2005, the annual growth rate of wheat production will fall from 1.29% in the baseline to 0.43% in the free trade scenario (Table 12). While wheat consumption growth rate will rise from 0.93% in the baseline to 2.06% in the free trade scenario in the same period. Wheat production is projected to be only 110.46 mmt in 2005, 5.06 mmt (or 4.4%) lower than that in the baseline projection. By 2005, the wheat imports will rise sharply from the 11.73 mmt in 2000 to 22.26 mmt in 2005. Comparing with the baseline projections, wheat consumption under the free trade scenario will tend to increase by 7.28 mmt (or 5.8%) in 2005. And the net impacts of the free trade verse baseline scenarios on wheat import will be as high as 12.34 mmt (rise from 9.92 mmt to 22.26 mmt) in 2005.

The soybean is the other grain crop that will be affected significantly by the trade

17

liberalization. By 2005, soybean consumption will reach 16.10 mmt (5.4% higher than baseline scenario), about 9% higher than its production (14.79 mmt, or 4.3% lower than the baseline)). Soybean net import will reach more than 1.3 mmt or about 8% of the domestic soybean consumption in 2005.

Rice and other coarse grains (mainly millet, sorghum and barley) are the only crops within grains that will benefit from the trade liberalization. Under the free trade scenario, rice production will rise from 132.52 mmt in 2000 to 144.65 mmt in 2005 with an annual growth rate of 1.77% (compared to the baseline of 0.89% in Table 12). The higher rate of production growth is the results of the rise in rice price and the decline in the prices of inputs such as fertilizer and pesticide under the free trade scenario. Meantime, the increase in the rice price reduces the annual rice consumption growth rate from 0.8% in the baseline to only 0.55% in the period of 2000-2005. Combined impacts of production and consumption imply that the impact of trade liberalization on rice export is substantial (7.12 mmt in 2005).

The impacts of trade liberalization on China’s animal sector are also significant. But in contrast to the grain sector, the trade liberalization will raise domestic prices of pork and poultry substantially, and a moderate rise in the prices of egg and fish. The increase in the prices of these major animal products and a decrease in the feed price resulting from the trade liberalization will stimulate the domestic production of these products on the one hand, and dampen their consumption on the other hand. Livestock and fish product exports will expand considerable (Table 13).

For example, under the free trade scenario, China’s domestic pork production will increase from 23.12 mmt in 2000 to 25.73 mmt in 2005 (Table 13), with an annual growth rate of 6.33% (3.39% in under the baseline scenario). While at the same time pork consumption annual growth rate will decline from 2.43% in the baseline to 2.16% in 2000-2005. The impacts on the pork export will reach 6.0 mmt in 2005.

A similar large impact of the trade liberalization is found for the production, consumption and trade of both poultry and fish simply because of the changes in their poultry prices. The only product that will be significantly and adversely affected by the trade liberalization is milk. About one quarter of the milk consumption will have to import from the world market after 2005, compared to about 3% only of imported milk only in the baseline scenario.

Impacts of Trade Liberalization on China’s Grain Self-sufficiency

Food security has been and will continue to be one of the central goals of China’s policy. While food security has many dimensions, one of the targets that was set by Chinese government recently is to achieve grain self-sufficiency level at or above 95% in the future. Although this level of grain self-sufficiency has been widely debated since it set up, any changes including the trade liberalization that could result

18

in the grain self-sufficiency level in the long term far bellow 95% would be hardly adopted by the current government if there is no alternative solutions available.

Table 14 presents China’s grain self-sufficiency rates under three scenarios for the period of 1995-2020. The third scenario assumes that the growth rate of agricultural research expenditure in the real term raises from 4% (the assumption use in the other scenarios) to 6% during the entire period of the projection.

Several interesting points could be derived from the results presented in Table 23. First, under the baseline scenario, while the grain self-sufficiency rate will decline over time (from 98.1% in the 1994-96 to about 96% in the most years of the next two decades), China will be able to achieve one of the major components of its food security (grain self-sufficiency) target in the future. Only grain that will fell its self-sufficiency level bellow 95% in the long term is maize. Maize self-sufficiency rate will decline significantly from 101.4% in 1994-96 to 93.9% in 2005 and further down to less than 90% in 2020.

Second, although the baseline scenario or the policies embodied in the baseline assumptions would ensure the high level of grain self-sufficiency, the costs related to this scenario should not be underestimated. All grain prices except rice in domestic markets will considerably exceed the prices in the international markets. For example, maize, wheat and soybean domestic prices will exceed international prices by about 26%, 20% and 21% in 2005, respectively, and the gap between the domestic and international prices will enlarge notably after 2005, particular maize price. Maize price will reach as high as wheat price by 2020. Whether government budget and consumers can sustain such a high level of grain price protection policy and how this will affect on the livestock production and export are the issues that needs to be considered.

Third, the completed trade liberalization (the free trade scenario) will obviously challenge the current food security goal defined by the government. China’s grain self-sufficiency rate will decline rapidly from 98% in the mid-1990s to 88.4% in 2005 (Table 14), a level is hardly accepted by the current government. Although the grain self-sufficiency rate will rise gradually after 2005, there will be still about 8% of domestic grain demand that needs to be met by the imported source in 2020. However, it is worth to note that this is an extreme case (the free trade regime), representing a maximum impact of the trade liberalization on China’s grain economy. The actual impacts of China’s joining the WTO will be lower than the results from this free trade scenario.

Fourth, the most effective policy that could improve China’s food security and raise grain self-sufficiency level in the long term is to increase the agricultural productivity enhancement investment such as agricultural R&D, rural infrastructure and water control (i.e., irrigation). For example, Table 23 shows that China could

19

achieve its grain self-sufficiency target in the long term (after 2015) under the free trade regime if the annual growth rate in agricultural research investment raises from 4% to 6%.

Finally, the shocks of the trade liberalization on China’s grains differ largely between food and feed grains. Maize will be the major imported grain and used in producing exportable livestock products. Therefore, it is not maize, but rice and wheat their domestic productions and self-sufficiency have directly and the most important impacts on food and, particular grain, security (food grain self-sufficiency) in China. If the food grain self-sufficiency concept could replace the total grain self-sufficiency and be adopted in China, China will achieve its 95% food grain self-sufficient level even under a completely liberalized market in the future (Table 14).

V. Conclusions and Policy Implications

Reform and trade liberalization in China's external sector, because of its strategic role in the economy, has proceeded gradually. Gradual trade liberalization as the reforms in the other sectors of China's economy has its logic. In the initial stage, reformers only implemented measures that provided incentives to sets of corporations and institutions. As the experience gained from the reform grows and the objectives of trade could be achieved through alternative settings of institutions and policies, trade liberalization has been processed smoothly since the late 1980s. Understanding the process will enhance the discussion about China's international trade and help the reader to put into perspective what leaders have done so far, what else they may be intending to do, and why or why they have not gone faster or further.

In the past 20 years, this study shows that the highly centralized and monopolized foreign trade operation system has been gradually reformed, decentralized, and commercialized through granting trade rights to more trade corporations and reducing government direct administrative intervention.

Trade regime has also been gradually moving from import substitution system to a more export-oriented system. Moving toward a more market-oriented trade system is evidenced from various aspects of China's trade policies and trade patterns. The centralized trade management and operation system was first replaced by the foreign trade contract responsibility system, and then was further replaced by taxing system; the foreign exchange retention system was abolished and replaced by foreign exchange bank settlement system; a single managed floating foreign exchange system was introduced in 1994; government export subsidies were phased out; and the financial system related to foreign trade was adjusted to meet the reformed trade system.

Foreign exchange control, though still highly intervened, has been relaxed significantly since the late 1980s by introducing foreign exchange retention system

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and establishing foreign exchange swap center in the early reform period, and the two-tier exchange rate was consolidated in December 1993. RMB became convertible on the current account at the end of 1996. While tariffs now are still high compared to the existing WTO's member countries and some non-tariff measures are commonly applied to "strategic products" such as agricultural and food products, foreign trade control in China has also significantly liberalized since the early 1990s. China’s average tariffs reduced from 47.2% in 1991 to 17% in 1998. Apart from these, China has actively participated in the consultations on the tariff-related actions for early voluntary sectoral liberalization.

During the 1980s China extensively used quotas and licensing to control its foreign trade. However, since the early 1990s China has progressively and drastically reduced the number of items subject to export and import quotas and licensing administration. The products subject to quota, licensing and other import control measures accounted for only 5% of the total import tariff lines in 1998.

In sum, through nearly 20 years reform, China’s foreign trade regime has gradually changed from a highly centralized, planned and import substitution regime to a more decentralized, market-oriented and export promotion regime. While significant progress has been made since the economic reform in liberalizing the trade regime, China’s foreign trade regime still has major inefficiencies. China still largely monopolizes international trade in agricultural products.

The reforms of the economy have significantly impacted on the structure of the economy. Even a more rapid growth and the trade pattern changes are recorded for China’s external sector. Because China’s overall trade growth has been much faster than that of agricultural trade, the importance of agricultural trade in China’s total trade has been declining considerably since 1980 and particularly since the early 1990s. Within various agricultural commodity trades, this study reveals two main points. First, the patterns of China’s agricultural trade were consistent with China’s domestic resource endowments during the reform period. China was a net exporter of labor intensive and labor/capital intensive agricultural products, like horticultural products, animal products and processed agricultural products, and was a net importer of land intensive agricultural products, like grains, cotton, and edible vegetable oils. Second, the study shows that since 1985 the patterns of China’s agricultural trade, particularly the patterns of agricultural exports, have been gradually moving more closely towards reflecting China’s resource endowments.

However, this study also reveal that the room for the further liberalization exists in terms of tariff reduction, limiting non-tariff measures to control agricultural imports, further commercialization of state trading, and the efficiency of the foreign trade management. In deed, China has decided to take a further trade liberalization in the coming years. This is evidenced in the recent Joint China-US Statement signed by China Premier Zhu Rongji and US President William Jefferson Clinton on the Status

21

of Negotiation on China's accession to the World Trade Organization in April 1999.

With the further trade liberalization and adjusting China trade regime consistent with joining WTO, it is expected that China will face great challenges in maintaining its current food self-sufficiency, a central agricultural policy that has been a top priority in setting China's all agricultural and agriculture related policies since the founding of the People's Republic of China in 1949.

Our simulation results on the trade liberalization conclude that the producers of most crops (except for rice and horticulture) will loss their income from the farming activities not only because of the decline in the price the farmer will received, but also the reduction in the production. While the most of animal product (except for beef, mutton, and milk) producers, particularly the farmers in raising hog and poultry, will benefit from the trade liberalization as the increase in the export demand rises the livestock price and increase in the maize import declines in the feed price.

The impacts of trade liberalization on China’s agriculture are remarkable not only on agricultural price and trade, but also on domestic production and consumption. Under free trade scenario, the fall in the domestic price of grain raises the grain consumption and slowdown the production. Our projection shows that China’s domestic grain production will fall far behind domestic grain consumption under the free trade scenario. Compared to the baseline scenario, grain deficit between domestic supply and demand will be further enlarged. China’s net grain imports will increase to about 60 mmt in 2005. Among these, 40 mmt or two third imported grains are maize.

Our study also concludes that maize, the third major crop just bellow rice and wheat, will soon grow over rice and wheat, and become a top crop not only in the quantity of its domestic consumption (demand), but will soon become the number one imported crop in China. China would likely be one of the world largest importers of maize in the coming years if the market will be liberalized.

In contract to many scholars’ believe, while the trade liberalization will raise wheat import in the short run, the wheat import will be soon declining after the initial shock of the trade liberalization. China will become a nearly self-sufficiency in wheat in the long term (by 2020). On the other hand, China is likely to be one of the major exporters of livestock products in the world. Pork and poultry exports will expand profound with the trade liberalization.

In related to the food security and grain self-sufficient issues, a completely liberalized economy in the short term will challenge the current food security goal defined by the government. China’s grain self-sufficiency rate will decline rapidly from 98% in the mid-1990s to less than 90% in 2005 if the free trade regime is assumed by the year of 2005. However, it is worth to note that this is an extreme

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case, representing a maximum impact of the trade liberalization on China’s grain economy. The actual impacts of China’s joining the WTO will be lower than the results from this free trade scenario.

When regarding the world food situation, our results suggest that China will neither empty the world grain markets, nor become a major grain exporter. It does seem likely, however, that China will become a more important player in world grain markets as an importer in the coming decades. Both potential exporters outside of China and those charged with managing China's food needs through domestic production and imports need to be ready. Exporting nations--especially those dealing with wheat (in the short run) and maize (in the long run) --will undoubtedly be the beneficiaries of these trends.

If China's policy makers believe the projected level of imports are too high (either politically or because they see some other physical or economic constraint), investment strategies need to be revised in the near future. In the long term, the most effective policy that could improve China’s food security and raise grain self-sufficiency level is to increase the agricultural productivity enhancement investment, particular agricultural R&D. If these policies are formulated properly, China could achieve its grain self-sufficiency target in the second decade of the next century even the grain market will be completely liberalized in 2000-2005.

China should allow a greater role for the market to determine trade patterns in order to reap comparative advantage gains. This would probably mean increased overall agricultural trade and a shift towards importing more land intensive agricultural products and exporting more labor intensive agricultural products. Policy steps to achieve comparative advantage gains might include removing implicit taxes on farmers and reforming domestic grain pricing and marketing system.

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Table 1. Annual Growth Rates (%) of China’s Economy, 1970-97Pre-reform

1970-78Reform period

1979-84 1985-95 1996-97Gross domestic products 4.9 8.5 9.7 9.2

Agriculture 2.7 7.1 4.0 4.3 Industry 6.8 8.2 12.8 11.4 Service na 11.6 9.7 8.0

Foreign trade 20.5 14.3 15.2 7.6

Import 21.7 12.7 13.4 10.8 Export 19.4 15.9 17.2 3.8

Population 1.8 1.4 1.37 1.03

GDP per capita 3.1 7.1 8.3 8.2Note: Figure for GDP in 1970-78 is the growth rate of national income in real term.

Growth rates are computed using regression method. GDP and per capita consumption growth rates refer to the value in real terms.

Source: State Statistical Bureau, China Statistical Yearbook, various issues.

Table 2. Foreign trade to GDP ratios (%) in China, 1980-97.Year Total

trade to

national GDP

Agricultural

trade to

agricultural

GDP

Total

export to

national GDP

Total

import to

national GDP

Agricultural

export to

agricultural

GDP

Agricultural

import to

agricultural

GDP

1980 12.7 10.3 6.0 6.7 4.6 5.6

1985 22.8 9.6 9.0 13.8 6.7 2.8

1990 29.8 14.5 16.0 13.8 9.1 5.4

1995 40.1 18.6 21.3 18.9 10.2 8.4

1997 36.0 14.9 20.3 15.8 9.1 5.8

Sources: State Statistic Bureau, China Foreign Economic Statistical Yearbook, various issues; China’ Customs Statistics, various issues; China Statistical Yearbook, various issues.

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Table 3. China’s Simple Average Applied Tariff Rate (%), 1998-2000.Item 1998 simple average

applied tariff rate

2000 simple average

applied tariff rate

Agricultural products (excluding fish products) 23.6 32

Fish and fish products 20.0 29

Petroleum oils 7.9 5

Wood, pulp, paper and furniture 14.5 17

Textiles and clothing 27.2 22

Leather, rubber, footwear and travel goods 17.0 20

Metals 10.1 9

Chemical and photographic supplies 11.9 10

Transport equipment 26.8 25

Non-electric machinery 14.2 11

Electric machinery 16.8 13

Mineral products, precious stones and metals 11.5 11

Other manufactured goods 16.8 13

All goods 17.0 15

Source: MOFTEC (1998), 1998 China’s Individual Action Plan on Implementing APEC Trade and Investment Liberalization and Facilitation (unpublished). The higher rates for some commodities in 2000 are due to the conversion of the trade control measures from non-tariff to tariff.

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Table 4. China’s Nominal Rates of Protection (%), 1978-98 1978-79 1980-84 1985-89 1990-94 1995-98a

Evaluated at the official exchange rateQuota procurement prices Rice -42 -43 -30 -37 -18 Wheat 15 -3 4 -14 -9 Maize 12 -15 -13 -35 -2 Soybean 2 13 -13 -32 -26

Negotiated procurement prices Rice -6 2 -5 -16 -7 Wheat 72 50 34 14 0 Maize 65 28 12 -7 8 Soybean 22 25 15 7 2

Market retail price Rice 38 19 14 -2 4 Wheat 89 58 52 26 20 Maize 92 46 37 12 25 Soybean 40 44 39 26 13

Procurement prices Rapeseed 11 22 -1 8 0 Cotton 0 4 -19 -26 -5 Sugarcane na na na -27 -15 Sugarbeet na na na -11 3

Evaluated at the real exchange rateQuota procurement prices Rice -73 -73 -69 -70 -41 Wheat -46 -54 -54 -59 -35 Maize -48 -60 -61 -69 -29 Soybean -52 -47 -61 -67 -48

Negotiated procurement prices Rice -56 -52 -58 -60 -34 Wheat -20 -30 -42 -46 -29 Maize -23 -40 -48 -55 -23 Soybean -43 -41 -49 -49 -28

Market retail price Rice -36 -44 -50 -53 -26 Wheat -12 -26 -34 -39 -14 Maize -10 -32 -40 -46 -10 Soybean -34 -32 -38 -40 -20Procurement prices

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Rapeseed -48 -43 -56 -48 -31 Cotton -53 -51 -63 -65 -35 Sugarcane na na na -64 -42 Sugarbeet na na na -56 -29

a: the period is 1995-96 for rapeseed, cotton, sugarcane and sugarbeet.Note: China’s import or export unit values are used as border prices except in the case of maize,

for which we used U.S. Gulf Port prices time 1.10 as the border price. No quality adjustments are made for all products.

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Table 5. Annual Agricultural Trade Indicators in China, 1980-97.

Period Agri. trade

(millionUS$)

Agri. share in

totaltrade (%)

Agri. export

(million US$)

Agri. share in

total export

(%)

Agri. import

(million US$)

Agri. share in

total import

(%)

Agri.trade

balance(million

US$)

80-84 9113 21.0 4368 19.8 4745 22.4 -37885-89 11906 13.4 7664 19.7 4243 8.5 342190-94 17048 10.4 11625 13.7 5423 7.0 620195-97 25772 8.7 14908 9.3 10864 7.9 4044Annual growth rate (%) 6.0 8.0 3.9

Sources:State Statistic Bureau, China Foreign Economic Statistical Yearbook, various issues; China’ Customs Statistics, various issues; China Statistical Yearbook, various issues.

31

Table 6. China’s Agricultural Exports by Commodity Grouping, 1980-97.

YearGrains and Vegetable

Oils

Horticultural Products Animal Products Other Agricultural

Products

Value

(US$ million)

Share

(%)

Value

(US$ million)

Share

(%)

Value

(US$ million)

Share

(%)

Value

(US$ million)

Share

(%)

1980 684 16.39 1883 45.12 1342 32.16 264 6.33

1981 894 21.27 1778 42.29 1355 32.23 177 4.21

1982 610 14.78 1926 46.68 1424 34.51 166 4.02

1983 837 19.73 1922 45.30 1272 29.98 212 5.00

1984 1321 25.94 2035 39.96 1335 26.22 401 7.88

1985 1927 33.14 2004 34.46 1302 22.39 582 10.01

1986 2009 30.04 2382 35.62 1568 23.45 728 10.89

1987 1874 24.81 2771 36.69 1880 24.89 1028 13.61

1988 2301 25.52 3365 37.31 2379 26.38 973 10.79

1989 2191 23.70 3743 40.48 2471 26.73 841 9.10

1990 2020 21.17 3785 39.67 2947 30.89 789 8.27

1991 2748 26.55 3992 38.57 2830 27.34 781 7.55

1992 2860 24.45 3803 32.51 3822 32.68 1212 10.36

1993 2868 24.17 4018 33.86 3858 32.51 1123 9.46

1994 3512 23.94 5075 34.60 5191 35.39 890 6.07

1995 1860 12.68 5924 40.37 6218 42.37 672 4.58

1996 1926 13.09 5725 38.91 6346 43.13 715 4.86

1997 3178 20.72 5294 34.52 6203 40.44 663 4.32

Source: Huang and Chen, 1999a.

Table 7. China’s Agricultural Imports by Commodity Grouping, 1980-97.

YearGrains and Vegetable

Oils

Horticultural Products Animal Products Other Agricultural

Products

Value

(US$ million)

Share

(%)

Value

(US$ million)

Share

(%)

Value

(US$ million)

Share

(%)

Value

(US$ million)

Share

(%)

1980 2806 54.89 226 4.42 298 5.83 1782 34.86

1981 3309 55.41 344 5.76 335 5.61 1984 33.22

1982 3506 60.65 379 6.56 511 8.84 1385 23.96

1983 2591 65.35 215 5.42 382 9.63 777 19.60

1984 1959 67.65 285 9.84 325 11.22 327 11.29

1985 1154 47.16 398 16.26 642 26.24 253 10.34

1986 1341 49.93 434 16.16 709 26.40 202 7.52

1987 2199 55.45 551 13.89 863 21.76 353 8.90

1988 2540 46.22 676 12.30 1292 23.51 987 17.96

1989 4160 62.85 487 7.36 838 12.66 1134 17.13

1990 3503 62.45 373 6.65 552 9.84 1181 21.06

32

1991 2792 56.02 438 8.79 799 16.03 955 19.16

1992 2808 53.27 506 9.60 1207 22.90 750 14.23

1993 1972 48.25 493 12.06 1450 35.48 172 4.21

1994 3666 51.16 366 5.11 1809 25.24 1325 18.49

1995 6879 57.00 895 7.42 1982 16.42 2313 19.16

1996 6032 56.30 1043 9.73 1972 18.41 1667 15.56

1997 5419 55.24 870 8.87 1873 19.09 1648 16.80

Source: Huang and Chen, 1999a.

33

Table 8. China’s Agricultural Exports by Factor Intensity, 1980-97.

YearLand Intensive Products Labor Intensive Products Labor/Capital Intensive Products

Value

(US$ million)

Share

(%)

Value

(US$ million)

Share

(%)

Value

(US$ million)

Share

(%)

1980 642 15.38 2346 56.22 1185 28.40

1981 806 19.17 2291 54.50 1107 26.33

1982 506 12.26 2341 56.74 1279 31.00

1983 713 16.80 2202 51.90 1328 31.30

1984 1368 26.87 2239 43.97 1485 29.16

1985 2119 36.44 2199 37.82 1497 25.74

1986 2116 31.64 2761 41.29 1810 27.07

1987 2088 27.64 3378 44.72 2087 27.63

1988 2157 23.92 4280 47.46 2581 28.62

1989 1878 20.31 4620 49.97 2748 29.72

1990 1689 17.70 4971 52.10 2881 30.20

1991 2415 23.33 4891 47.25 3045 29.42

1992 2237 19.12 5049 43.16 4411 37.71

1993 2222 18.72 4919 41.45 4726 39.82

1994 2590 17.66 6726 45.85 5352 36.49

1995 875 5.96 7095 48.35 6704 45.69

1996 1007 6.84 6496 44.15 7209 49.00

1997 2158 14.07 6538 42.63 6642 43.30

Source: Huang and Chen, 1999a.

Table 9. China’s Agricultural Imports by Factor Intensity, 1980-97.

YearLand Intensive Products Labor Intensive Products Labor/Capital Intensive Products

Value

(US$ million)

Share

(%)

Value

(US$ million)

Share

(%)

Value

(US$ million)

Share

(%)

1980 4256 83.26 314 6.14 542 10.60

1981 4820 80.71 375 6.28 777 13.01

1982 4182 72.34 572 9.89 1027 17.77

1983 2846 71.78 431 10.87 688 17.35

1984 1952 67.40 395 13.64 549 18.96

1985 1072 43.81 680 27.79 695 28.40

1986 1246 46.39 761 28.33 679 25.28

1987 2077 52.37 961 24.23 928 23.40

1988 2275 41.40 1411 25.68 1809 32.92

1989 4545 68.67 949 14.34 1125 17.00

1990 4032 71.88 642 11.45 935 16.67

1991 2989 59.97 867 17.40 1128 22.63

1992 2339 44.37 1581 29.99 1351 25.63

34

1993 1173 28.70 1793 43.87 1121 27.43

1994 3245 45.28 2596 36.23 1325 18.49

1995 6575 54.48 3278 27.16 2216 18.36

1996 5603 52.30 2289 21.36 2822 26.34

1997 4644 47.34 2179 22.21 2987 30.45

Source: Huang and Chen, 1999a.

35

Table 10 Trade Balance of Agricultural Commodities in China (US$ Million), 1980-97.

Annual Average1980-84 1985-89 1990-94 1995-97 1980-97 Total

Total Agri. Imports -378 3421 6201 4044 3242 58356

Grain & Edible Vegetable Oils -1965 -218 -147 -3789 -1279 -23016

Cereals -2287 -913 -337 -1863 -1293 -23272 Cereal products & animal feed 87 369 312 -468 136 2439 Oil seeds 225 578 553 34 382 6878 Edible vegetable oils 10 -253 -675 -1491 -503 -9061

Horticultural Products 1619 2344 3699 4712 2914 52446

Vegetables and fruits 764 1223 2054 2850 1598 28756 Coffee and tea 296 414 455 486 405 7284 Tobacco -62 -136 304 521 116 2092 Raw silk 233 295 318 272 280 5047 Other horticultural products a 388 547 568 583 515 9267

Animal Products 975 1051 2566 4313 1995 35904

Live animals 355 340 435 448 388 6990 Meat products 424 517 896 2206 878 15803 Dairy and egg products 50 11 42 111 47 845 Seafood products 316 629 1100 1323 789 14193 Raw wool -159 -476 -277 -564 -347 -6249 Other animal products b -10 31 370 789 240 4322

Other Agri. Products -1007 245 82 -1193 -388 -6978

Sugar -299 -260 131 -281 -166 -2982 Beverages 43 88 243 369 165 2978 Raw cotton -752 416 -291 -1280 -387 -6974Source: Huang and Chen, 1999a.

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Table 11. Impacts of trade liberalization on agricultural commodity prices in China (the free trade vs baseline scenarios), 2000-2005

Price in 2005(yuan/ton in 1995

price)

Price change in 2000-2005

(%)

Percentage price difference in 2005

(%)Baseline Free trade Baseline Free trade Free trade vs baseline

Rice 2333 2415 -0.4 4.1 3.5Wheat 1756 1406 -1.1 -20.2 -19.9Maize 1459 1080 7.5 -20.1 -26.0Soybean 2918 2322 0.4 -20.2 -20.4Sweet Potato 1208 1066 0.7 -9.6 -11.8Potato 1211 1085 -0.4 -9.5 -10.4Other grains 2290 2097 -1.8 -9.7 -8.4Pork 12795 14633 0.8 14.8 14.4Beef 14666 14518 1.8 0.0 -1.0Mutton 18841 18345 3.4 0.0 -2.6Poultry 11643 12798 0.9 10.4 9.9Egg 6557 6831 -3.5 0.0 4.2Milk 3379 2672 1.5 -20.2 -20.9Fish 9032 9529 -4.8 0.0 5.5

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Table 12. Impacts of the trade liberalization (free trade) on grain production, consumption, and trade, 2000-2005.

Baseline Free trade scenarioFree trade vs baseline

scenarios

CommodityIn the year

of 2005

(000 tons)

Annualgrowth rate in

2000-05 (%)

In the year

of 2005

(000 tons)

Annualgrowth rate in

2000-05 (%)

Difference in 2005

(000 tons)

Annual average

differencein 2000-05(000 tons)

Rice Production 138908 0.89 144652 1.77 5744 2419 Consumption 139690 0.88 138313 0.55 -1377 -248 Net import 782 -6339 -7121 -2668Wheat Production 115519 1.29 110458 0.43 -5061 -2672 Consumption 125440 0.93 132721 2.06 7281 4059 Net import 9921 22263 12342 6731Maize Production 133209 2.33 122793 0.69 -10416 -5375 Consumption 141898 3.35 162105 5.91 20207 11389 Net import 8689 39312 30623 16764Soybean Production 15459 1.37 14792 0.47 -667 -331 Consumption 15278 1.46 16102 2.41 824 533 Net import -181 1310 1491 865Sweet potato Production 25712 1.33 25502 1.26 -210 -233 Consumption 25599 1.34 26872 2.17 1273 792 Net import -113 1370 1483 1024Potato Production 10678 1.45 10588 1.35 -90 -95 Consumption 10732 1.43 10831 1.48 99 107 Net import 54 243 189 202Other grains Production 24292 0.84 24360 0.93 68 14 Consumption 24943 0.39 25810 1.01 867 498 Net import 647 1450 803 485Total grains Production 463777 1.44 453145 1.02 -10632 -6272 Consumption 483577 1.60 512753 2.69 29176 17130 Net import 19799 59608 39809 23402

38

Note: Consumption (or demand) includes stock changes.

39

Table 13. Impacts of the trade liberalization (free trade) on livestock products and fish production, consumption, and trade, 2000-2005.

Baseline Free trade scenarioFree trade vs baseline

scenarios

CommodityIn the year

of 2005

(000 tons)

Annualgrowth rate in

2000-05 (%)

In the year

of 2005

(000 tons)

Annualgrowth rate in

2000-05 (%)

Difference in 2005

(000 tons)

Annual average

differencein 2000-05(000 tons)

Pork Production 27703 3.39 31984 6.33 4281 2071 Consumption 27462 3.43 25727 2.16 -1735 -839 Net import -241 -6257 -6016 -2910Beef Production 3015 4.49 3090 4.94 75 39 Consumption 2998 4.54 3119 5.49 121 53 Net import -17 29 46 14Mutton Production 1746 4.35 1779 4.68 33 18 Consumption 1745 4.36 1841 5.58 96 42 Net import -0.5 62 63 24Poultry Production 7595 4.66 8683 7.42 1088 525 Consumption 7885 4.61 7502 3.66 -383 -187 Net import 290 -1181 -1471 -712Egg Production 14848 4.21 16478 6.32 1630 799 Consumption 14817 4.21 14547 3.89 -270 -129 Net import -31 -1931 -1900 -927Milk Production 9364 6.86 8888 5.68 -476 -209 Consumption 9697 6.67 11716 10.90 2019 910 Net import 333 2828 2495 1118Fish Production 15081 5.89 15721 6.72 640 307 Consumption 14909 5.73 14581 5.37 -328 -169 Net import -172 -1140 -968 -476

Note: the production and consumption data used in CAPSiM model are significantly different from the data published by the State Statistical Bureau. The database in CAPSiM on the livestock and aquatic production and consumption correct for the problems on over-reporting productions and under-estimating consumption of these

40

products.

41

Table 14. Grain self-sufficiency rates (%) under various scenarios, 1995-2020.1994-96 2005 2010 2020

Baseline: Total grain 98.1 95.9 96.1 96.9 Rice 99.7 99.4 99.9 101.3 Wheat 92.2 92.1 95.1 99.7 Maize 101.4 93.9 91.3 89.8 Soybean 100.1 101.2 101.9 102.9Free trade Total grain 98.1 88.4 89.9 92.1 Rice 99.7 104.6 107.1 114.7 Wheat 92.2 83.2 88.3 96.9 Maize 101.4 75.7 74.4 72.2 Soybean 100.1 91.9 94.4 95.5Free trade with raise inagri research expenditure* Total grain 98.1 88.4 90.4 97.2 Rice 99.7 104.6 107.6 119.5 Wheat 92.2 83.2 88.8 102.1 Maize 101.4 75.7 75.0 77.7 Soybean 100.1 91.9 95.0 100.7*: The third scenario assumes that the growth rate of agricultural research expenditure in the real term raises from 4% (the assumption use in the other scenarios) to 6% during the entire period of the projection.

42